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24 votes
Accepted

Which process is the most commonly used for modeling stock prices?

I give you a brief outline about some key properties of Lévy processes. Lévy processes have stationary and independent increments but do not necessarily have continuous sample paths. In fact, ...
Kevin's user avatar
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17 votes

What is the difference between pull to par and roll down in both mathematics and conceptual?

Pull-to-par just says that a bond's (clean) price will converge towards its face value as the bonds approaches maturity. There is nothing really interesting about pull-to-par - a bond's (clean) price ...
Chris Taylor's user avatar
  • 5,901
13 votes

What is the difference between pull to par and roll down in both mathematics and conceptual?

Pull-to-par says that the bond's price will gradually converge toward par (100% of face value) when yield is unchanged. This process is also known as accretion for a bond trading at a discount (since ...
Helin's user avatar
  • 11.6k
13 votes

Choosing the right statistical test for Mutual Fund Performance Evaluation

Define excess return $r^x_{it} = r_{it} - r^f_{t}$ as the return $i$ minus the risk free rate, and $f_{jt}$ similarly denotes the excess return of factor $j$ at time $t$. Let's say we have some factor ...
Matthew Gunn's user avatar
  • 6,934
12 votes

Fama Mac-Beth (1973) vs Fixed effect

A more apples to apples comparison would be between (i) Fama-Macbeth procedure and (2) clustering standard-errors by date. Adding fixed-effects is somewhat different. Problem: cross-sectional ...
Matthew Gunn's user avatar
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11 votes

How do I convert order book data into OHCL( Open,High,Low,close) format?

As Alex C. notes, OHLC bars are meant to be calculated using transaction ticks. However, you could try to make bars from bid/ask individually (or perhaps even the mean of the two as an approximation), ...
lagrange103's user avatar
11 votes
Accepted

Risk Model Validation

You should read this regulatory guidance: U.S.: SR 11-7: https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf (it is identical to FHFA AB 2013-07 Model Risk Management Guidance, OCC ...
Dimitri Vulis's user avatar
10 votes
Accepted

Does financial math benefit society?

It is not financial mathematics in general, but a scientific approach that is beneficial: quantitative views and open objective tools make transactions more transparent. It decreases information ...
lehalle's user avatar
  • 12k
10 votes
Accepted

What is the stambaugh bias? Why is it important for predictability regressions?

The bias comes from the paper Stambaugh (1999) and has nothing to do with small sample bias. It has to do with point (1) below. The argument goes as follows: Typical lagged explanatory variables ...
phdstudent's user avatar
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10 votes
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When would open interest equal trading volume?

Futures are in "zero net supply", or "for every long there is a short", which means that at any time there are investors who are long a certain number of contracts and other investors who are short an ...
Alex C's user avatar
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9 votes
Accepted

Show that $\frac{\partial c(t))}{\partial \sigma^2 }>0 \text{ if and only if } S(t)<Xe^{-r(r+\frac{1}{2} \sigma^2 )(T-t)}.$

Hints: You know the vega of a digital call option formula: $V=-\frac{e^{-r(T-t)}}{\sigma} d_1 n\left(d_2\right)$ Where n is the standard normal density, which is positive. Sigma and exponential are ...
Magic is in the chain's user avatar
8 votes
Accepted

Finding arbitrage opportunity

Generally speaking, let us consider a problem where you have a series of simple payoffs $f_{K_i}(S_T)$ of strike $K_i$, $i \in I$, that depend on the value of $S_T$ at time $T$, as well as a more ...
Daneel Olivaw's user avatar
8 votes
Accepted

How does one calibrate lambda in a Avellaneda-Stoikov market making problem?

(First of all, sorry to have taken so much time to see this question...) For the paper you refer to (Guéant-L-Tapia), there is a report (in French) by Sophie Laruelle about how to do it in practice: ...
lehalle's user avatar
  • 12k
8 votes

Financial economics vs finance

Financial economics is what economics calls finance. Finance is what finance calls finance. Less flippantly though, there's a long debate on whether finance is a subfield of economics, and this ...
Matthew Gunn's user avatar
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8 votes
Accepted

What drives the idiosyncratic volatility puzzle?

Preliminary The empirical finding of a strong negative cross-sectional relation between idiosyncratic volatility and future stock returns is highly inconsistent with the predictions of all theoretical ...
skoestlmeier's user avatar
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8 votes
Accepted

Inverse Covariance Matrix Transformation from CAPM

This is the result of the Sherman-Morrison inversion for the sum of an invertible matrix and an outer product. You will find this (and many other helpful methods) in the Matrix Cookbook. Specifically, ...
Kermittfrog's user avatar
  • 6,535
7 votes

What data sources are available online?

Here's a snippet of a detailed list of data sources and tools which available on my blog at http://the-world-is.com/blog/resources/general-investor-resources/. Fundamental Financial Data ...
7 votes
Accepted

What is the most stable, non-trivial dependence structure in finance?

It is hard to find a stable non-trivial dependence structure in financial data. Usually when such is found it is hard to rationalize. One of my favorite (although I am sure there are others) is the ...
phdstudent's user avatar
  • 8,071
7 votes

MATLAB or Python as starting language?

These questions inevitably elicit strong responses. The truth is that both are excellent. I used Matlab when I first entered the industry, but have since migrated 100% to Python. I'll provide some ...
Helin's user avatar
  • 11.6k
7 votes

Where can I find detailed information of famous quant companies such as Renaissance Technologies?

Most RIAs have to file a Form ADV, through which some information is publicly available via SEC's website. Further, large RIAs are sometimes involved in high profile civil lawsuits through which ...
databento's user avatar
  • 2,468
7 votes
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Explanation for Different Piecewise Yield Term Structures from QuantLib Python

When you bootstrap a curve, you get discount factors/zero rates for the maturities of the instruments you supplied. So in practice, you get points, and not a "curve". After you have built ...
David Duarte's user avatar
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6 votes
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What are the books in which to study the basics of the derivative financial instruments?

As mentioned by @Adam, Stochastic Calculus for Finance by Shreve is a good start if you have a reasonably strong mathematical background. Volume I is simpler, as it presents derivative pricing methods ...
Daneel Olivaw's user avatar
6 votes

A libor curve VS A 3-month or 6-month libor curve

A 3 month libor curve is a set of forward rates for 3 month libor. Thus, the curve begins at where 3 month libor is today , and takes different values for each possible forward observation date. ...
dm63's user avatar
  • 16.9k
6 votes
Accepted

Why James Simons trades it only if it is liquid?

Liquid => low transactions costs. When you are trying to take advantage of small anomalies you need transaction costs to be low. [Added 2017-08-13] Simons does not believe there are big price ...
Alex C's user avatar
  • 9,372
6 votes
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CAPM and factor modeling: Machine learning

1) In an academic sense could it be enough to use ML to create a new factor portfolio? The original FF papers (92,93) said something deep because they contradicted the dominant theory of the day. ...
jd8's user avatar
  • 468
6 votes
Accepted

Fama MacBeth cross-sectional Regression

Preliminary The main result of the Fama-MacBeth procedure is to calculate standard errors that correct for cross-sectional correlation in a panel. It is a commonly used method due to it's easily ...
skoestlmeier's user avatar
  • 2,916
6 votes

Pricing an fx option in the same currency

Let $P^d$ and $P^f$ denote the respective USD and EUR risk-neutral measures. We assume that, under the USD risk-neutral measure, \begin{align*} dS_t = S_t \Big(\big(r^d-r^f \big)dt +\sigma dW_t \Big), ...
Gordon's user avatar
  • 21.1k
6 votes
Accepted

Compute the price of a derivative

If you plot the function $f$, you see that you have a bear spread. You can build such vertical spreads either with call or put options. For example consider a portfolio selling one put option with ...
Kevin's user avatar
  • 15.7k
6 votes

Pricing In Real Life vs Theory

1. Let me first reconcile the Black-Scholes pricing formula with the idea of prices being determined by supply-and-demand. Even if it is not explicitly said this way, from an equilibrium perspective, ...
Stéphane's user avatar
  • 2,456
6 votes

Can we think of Overnight Index Swaps as short-term IRS?

An Interest Rate Swap (IRS) normally refers a swap between a fixed rate and a floating rate. Floating rate being a single fixing for each accrual period and payment. An overnight indexed interest-rate ...
David Duarte's user avatar
  • 5,795

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